I write on white-collar crime and how seemingly good, smart people are capable of doing the dumbest things. I am also interested in covering the consequences of these crimes and to provide a perspective that is much different than the mainstream stories on crime. Since 2003, I have presented my personal story of white-collar crime to universities, the FBI, various professional societies and corporations around the world. I co-authored "Stolen Without A Gun" with Neil Weinberg, former Executive Editor Forbes Magazine (now Editor at American Banker). On a good day, I'll be writing for Forbes or speaking to a business audience.

11/21/2012 @ 4:40PM1,899 views

The Government's Challenge In Going After Steve Cohen

One should think by now, “Why don’t they [FBI] just arrest SAC Capital’s Stevie Cohen?” They’ve arrested enough people around Cohen to justify it.

Scott Eells/Bloomberg via Getty Images

Business Insider was kind enough to put together a cast of SAC alumni who have fallen from grace as a result of insider trading: 1) Choo Beng Lee has pleaded guilty and is currently cooperating, 2) Noah Freeman who got hot stock tips from a Primary Global consultant has pleaded guilty and is cooperating, 3) Donald Longueuil pleaded guilty and is currently in prison, 4) Jon Horvath has pleaded guilty and is awaiting sentencing, 5) Anthony Chiasson is currently on trial for insider trading, and 6) Mathew Martoma was arrested yesterday for getting a hot stock tip on an Alzheimer’s drug that had failed clinical tests. Enough already. Okay, Cohen’s hiring practices weren’t the best, but that doesn’t make him guilty.

Noah Freeman is a cooperating witness and is awaiting sentencing for his role in getting inside information from consultants hired by the expert network firm Primary Global. According to FBI notes taken by Special Agent B.J. Kang, Freeman said that while he worked for Cohen at a SAC subsidiary that, “…. your best trading ideas involved providing Cohen with inside information.” Of course, notes taken by FBI agents during interrogations are not admissible in court. So that’s not going to help nail Cohen.

The arrest of Martoma has nailed down the transaction that could be used against Cohen. According to the NY Times, Martoma used an expert network consultant who had information on the clinical trials of an Alzheimer’s drug being jointly developed by Elan and Wyeth. Martoma got the word that the trials were not successful and proceeded to let Boss-Man Cohen know the information …. which was important since SAC (CR Intrinsic) had a large position in those shares thinking the drug was going to be approved. Martoma said “sell” and Cohen did just that. The issue is that this information was more widely known in the investment community at the time. One day trader I know, who wished to not be identified, told me the following regarding Elan shares:

I remember how big the short position was in Elan when those trials [Alzheimer drug trials] were coming out. It was insane. I couldn’t even get a locate to borrow the stock. I knew the upside was enormous [with successful trials], and it didn’t make sense how so many people could be short [didn't like the stock]. People always know on these trials. I’m sure tons of people were involved in that.

Interpretation: The news of an upcoming failure of the drug had already been leaked, or known, by so many people that it was impossible to get in on the action. The only suckers, victims, were those buy and hold investors that represent us 99%’ers. In other words, the entire Wall Street establishment knew the news on the Elan drug was negative and that the stock would dive. It’s hard to prosecute just one guy when there were thousands who seem to have had the same information. A good insider trader doesn’t want to be the first to buy or sell, he/she just wants to be in the herd that makes the move to run.

The big “if” in this case will be if Martoma will become a government witness and turn on Mr. Cohen. While we are only hearing of Martoma today, he has known about this investigation for years, giving him plenty of time to cooperate if he wanted to do so. However, the amount involved in the trade, over $270 million, is a game changer. Federal Sentencing Guidelines would make his prison sentence “Life” … which is a long time for someone 38 years old. His cooperation would change things in prosecuting Cohen, just as it did for those who cooperated against Rajat Gupta. It may not result in a guilty verdict against Cohen, but it would sure help Martoma.

Tonight, Cohen can contemplate a Thanksgiving with the family … but next Thanksgiving? Maybe. It might be up to Martoma.

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